National income accounting 1
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Transcript of National income accounting 1
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NATIONAL INCOME ACCOUNTING
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Trends in India’s GDP
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Methods: Income approach Expenditure approach Final Output approach By the circular flow we know all
approaches will give same result
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The Income Approach The income approach is shown on
one half of the circular flow. Firms make factor payments to
households for supplying their services as factors of production.
Households spend the income they earn on goods and services
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Output Method; Adds up the market values of all
goods and services produced . It ignores intermediate goods and
second hand sales of goods This avoids double counting
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Expenditure Method: Consumption Investment Government purchases Net exports: exports less imports Consumption involves spending on
services, durable goods and non durable goods
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Expenditure method: Investment is gross private domestic
expenditure on new capital goods , depreciation and inventories.
Investment excludes : household purchases of durable goods purchase of existing buildings and
machines purchase of stock and financial assets.
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Expenditure method: Government expenditure includes
spending on goods and services but excludes transfer payments.
Net exports = exports less imports GDP = C+I+G+X-M C+S+NET TAXES=C+I+G+X-M S+M+T=I+G+X LEAKAGES = INJECTIONS
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Equality of Income and Expenditure GDP is calculated either by adding
up all values of final output or by adding up the values of all earnings or income.
GDP at market prices equals the sum of market values of all goods produced in the economy
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Gross vs Net: Depreciation or capital consumption
is the amount by which an assets value falls in a given period.
Net Investment = Gross Investment less depreciation.
Capital stock at end of period = capital stock at beginning of period +net investment
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Qualifications to the Income Accounting Identity To go from GDP to national income:
Add net foreign factor income. National income is all income earned by
citizens of a nation and is equal to GNP. To move from "domestic" to "national" we
add net foreign factor income. Subtract depreciation from GDP. Subtract indirect business taxes from
GDP.
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The Income Approach National income is the total income
earned by citizens and businesses in a country in one year.
It consists of employee compensation, rent, interest, and profits.
NNP at factor cost = National Income
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GDP and GNP: GNP is total value of goods and services
produced in a year by domestically owned factors of production (only final goods) regardless of where the output is produced
E.g. German owned car factory in US is a part of German GNP.
GDP is value of final goods and services produced within a country’s borders.
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GDP and GNP: Output of the Honda plant in USA
is a part of US GDP but Japanese GNP
Wages paid to American employees is a part of US GNP
Profits from the plant are a part of Japanese GNP but not GDP
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National income National Income = net national product
at factor cost NNP at factor cost = GDP at market prices
less indirect taxes plus subsidy+ NFIA less depreciation NFIA can be positive or negative= receipt
of factor income from the rest of the world minus the payment of factor income to the rest of the world.
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National income: Total of income earned by the
factors of production , owned by a country’s citizens.
=compensation to workers+ proprietors income (income of unincorporated business)
+ corporate profits+ net interest (paid by business)+ rental income
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Personal Income Personal income (PI) is national
income plus net transfer payments from government minus amounts attributed but not received.
PI = NI + Transfer payments from government + Net non-business interest income– Corporate retained earnings– Social security taxes
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PERSONAL INCOME GDP + NFIA = GNP Less depreciation = NNP Less indirect taxes plus subsidies =national income (NNP at factor cost)Less (corporate taxes+ retained profits)Plus interest income received from
government Plus transfer payments = Personal Income
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Disposable Income: Disposable personal income is
personal income minus personal income taxes and payroll taxes.
Disposable personal income is what people have readily available to spend.
DPI = PI - Personal taxes
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Uses of GDP Accounting: GDP figures are used to make comparisons
among countries and to measure economic welfare over time.
GDP gives a measure of economic size and power.
Per capita GDP is another measure often used to compare nations' GDP.
Because of differences in non-market activities, per capita GDP can be a poor measure of the living standards in various nations.
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GDP figures leave out the following: Illegal drug sales. Under-the-counter sales of goods to
avoid income and sales taxes. Work performed and paid for in cash. Unreported sales. Prostitution, loan sharking, extortion,
and other illegal activities.
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GDP as an indicator of economic welfare: GDP excludes unpaid economic activity Comparisons between countries are
distorted by changes in exchange rates. In countries with a large underground
economy , underestimation is likely GDP does not give indication about
standards of living It ignores distribution of income.
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GDP as an indicator of economic welfare: Nominal GDP values ignore inflation High GDP values are often
correlated with negative externalities such as pollution
Natural disasters raise GDP values but does not indicate a healthy economy.
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Limitations of National Income Accounting
Measurement problems exist. GDP measures economic activity, not
welfare. Subcategories are often
interdependent. Non market activities are not
accounted for.
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Real vs nominal GDP Just because GDP rose does not mean
welfare rose – it could be only prices rose. Comparing output over time is best done
with real output which is nominal output adjusted for inflation.
Nominal GDP is GDP calculated at existing prices.
Real GDP is nominal GDP adjusted for inflation.
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Real GDP Real GDP is
arrived at by dividing nominal GDP by the GDP deflator.
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GDP DEFLATOR:
Ratio of nominal to real GDP
Prices of current and base year are weighted by quantities of current year.
Nominal GDP has gone up by 58.7%but GDP at year 1 prices =15.10 .So an increase of 24.8%
qty1
qty2 prc1 prc2 gdp1 gdp2
A 6 11 .5 .4 3 4.4
B 7 4 .3 1 2.1 4
C 10 12 .7 .9 7 10.8
12.1
19.2
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Purchasing Power Parity: Purchasing power parity is used to
get around the problems of per capita GDP.
Purchase power parity adjusts for different relative prices among nations before making comparisons.
E.g. McDonald Index
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Laspeyre’s Index: Cost of purchasing base year
basket at current year prices divided by cost of base year basket at base year prices
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New WPI LAUNCHED